What is a Capital Gain?
A capital gain is the difference between the acquisition price and the selling price of anything including a capital item. It is the appreciation in the value of the item from the time it was bought to the time of selling it.
Hence, a capital gain in a property is the difference between the selling price and the cost of the property.
Actual cost of the property
The cost of the property is up to and including the costs of current sales transaction. Therefore, the costs of the property up to the selling point are:
- Cost of property (property buying price plus expenses incurred when buying the property (legal fees, brokerage fees, property search etc.).
- Incidental costs incurred to maintain the property up to the point of taking the property to the market.
- Expenses incurred in the market selling the property (legal fees, advertisements fees, brokerage fees).
What are incidental costs?
Incidental costs are the costs that the current owner of the property has incurred from the day they acquired the property up to the point of taking the property to the market. These are costs that have been incurred to maintain the property throughout the years.
The costs have been incurred to maintain or improve the property. Examples of some of the incidental costs that are incurred are:
- Land rates.
- Land rent.
- Security for the property.
- Labor expenses (e.g to keep the compound clean).
- Supervision expenses such as fuel costs, phone expenses.
- Costs of any improvements such as fencing costs.
What is the selling price?
The selling price is the current market value of the piece of land. It is actually the arm’s length price.
What is the actual capital gain?
The actual capital gain can be either of the following:
- Positive – where the selling price is more than the acquisition price.
- Negative – where the selling price is lower than the acquisition price.
- Zero – where the selling price is equal to the acquisition price.
What is capital gains tax?
Capital gains tax is the tax on the capital gain. It is only applicable when the actual capital gain is positive. When there a negative capital gain, the loss may be carried forward to be utilized in similar transactions.
What is the capital gains tax rate in Kenya?
The capital gains tax rate in Kenya is 5 % effective from 1st January 2015 according to the Finance Act 2014. Transfer of land, buildings and securities (with exceptions) attracts tax at the rate of 5 %. The tax is payable by the 20th of the month after the transaction. It is the responsibility of the transferor to make the tax payment. There are no tax returns.
What properties attract capital gains in Kenya?
There are three types of properties that attract capital gains tax. These are:
Capital gains tax in the extractive industry
Transfers in the extractive industry (mining and petroleum industry) also attracts the tax at the rate of 30 % for residents and 37.5 % for non- residents with permanent establishments in Kenya. The transferor has the responsibility of making the tax payments.
Is capital gains tax a final tax in Kenya?
In Kenya, capital gains tax is a final tax.
When is capital gains tax applicable?
Capital gains tax in Kenya is applicable after completion of the transfer of the properties on sale (land, buildings or shares) – ( Refer to ruling by Justice John Mativo in September 2017).
Who is responsible for capital gains tax?
The person(s) who transfer the property has the responsibility to account for capital gains tax. The person(s) complete the declaration forms, determines the capital gains tax and remits the tax to KRA.
When does transfer of a property take place?
Transfer of a property takes place when either of the following takes place on:
- Conveying a property.
- Disposal of a property.
- Exchange of a property.
- Sale of a property.
- Loss of property.
- Destruction of a property.
- Extinction of a property.
- Abandonment of a property.
- Surrender of a property.
- Cancellation of a property.
- Forfeiture of a property.
- Expiration of a property rights.
What transfers are exempted from capital gains tax?
There are transfers that are exempt from capital gains tax. The following are some of the transfers that are exempt.
- Sale or transfer of a deceased person’s properties for purposes of estate administration.
- Family property transfers between former spouses, spouses and close family members.
- Transfer for loan or debt security.
- Transfer of shares and other securities sold and bought at the Nairobi Securities Exchange.
- Transfer of recognized retirement benefits scheme’s securities.
- Transfer by tax exempted organizations (according to Income Tax Act Cap 470).
- Public interest transfers authorized by Treasury during restructuring or reorganizations.
- Transfer of less than 50 acres of agricultural land.
- Transfer of land sales of less than kshs 3 million.
- Transfer of personal residence occupied for 3 years preceding transfer.
- Consigning a property to an official receiver or liquidator.
- Sale of deceased person’s properties during administration.
- Machinery transfers (e.g. motor vehicles).
- Issuing a company’s debentures or shares.
- Income from transfer of property taxed elsewhere.
How is capital gains tax paid?
The person transferring the property completes the necessary forms, generates the payment slip through i-tax and makes the payments. Prove of payment must be produced at the point of paying duty. Capital gains tax is payable after the sales transaction is complete.
When is capital gains tax remitted?
Capital gains tax is paid by the 20th day of the month after the transfer.
What happens when capital gain is zero?
There is no capital gains tax to pay.
What happens when there is capital loss?
When a property is transferred and instead of a gain there is a loss, the transferor is allowed to carry forward the loss to utilize it in other transactions at a later date.
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This post is for general overview and guidance and does not in any way amount to professional advice. Consequently, www.taxkenya.com, it’s owner or associates do not take any responsibility for results of any action taken on the basis of the information in this post or for any errors or omissions. Kenyan taxpayers must always rely on the most current information from KRA. Tax industry in Kenya is very dynamic.